HomeHow to Tell When it is Time to Refinance
by Michael W. Licamele, III
W ith interest rates today being at their lowest in the past year, youprobably have wondered whether or not you should refinance your existinghome mortgage. This guide can help you determine how much you will saveby refinancing.
The old rule of thumb for refinancing was that, in order for refinancingto be worth while, the new interest rate must be at least 2% lower thanthe old interest rate.
The old rules of refinancing are now gone! Today, as little as a 1/2%interest rate decrease through refinancing can save you thousands of dollarsif executed properly and in accordance with your specific financing needs.A variety of loan terms, no-point rate options and lower closing cost loanshave greatly decreased the rate difference needed to make refinancing profitableto you.
Why Should You Consider Refinancing?
In addition to just lowering your inter- est rate, there are eight majorreasons why you should take advantage of refinancing:
1) Maximize short term cash flow with lower payments or a longer term.
2) Decrease monthly payments for as long as you plan to be in your home.
3) Switch to a fixed rate program to eliminate payment changes of ARMs.
4) Build up equity by paying down principal more quickly.
5) Match your loan term to the years until your retirement.
6) Switch out of an adjustable loan with old high lifetime payment caps.
7) Withdraw funds from the equity in your home for tax deductions.
8) Consolidate other debts to take advantage of tax deductions.
Would Refinancing Be Worthwhile?
Refinancing can almost always be worthwhile, but it does not make goodfinancial sense for everyone. There are four main factors to analyze whendetermining the costs and benefits of refinancing:
1) What will be the difference between the old rate and the new rate?
2) What are the total costs associated with the refinance transaction?
3) How closely is the loan term matched with the expected holding periodof the loan?
4) How comfortable are you with possible payment changes over the lifeof your mortgage loan?
The savings you can obtain from refinancing depend directly on the answersto the above four questions. There are numerous potential combinations ofthe above four areas, and there are numerous mortgage programs to meet eachneed.
What are the Costs of Refinancing?
The costs of refinancing have decreased greatly in the past several years.With no-point loan options, for example, borrowers can save thousands ofdollars up front. Also, closing costs can be included in the new mortgageloan amount so that no cash is required to execute a refinance.
As part of a free Refinance Analysis, your mortgage lender or brokerwill give you a specific breakdown of all closing costs for the recommendedprograms. You will then be able to calculate your savings exactly.
Michael W. Licamele, III is editor of The Mortgage Almanac.